Few things take the joy out of taking on a new client like finding that they have been taking improper deductions. Even worse is when they say “we’ve been audited and the IRS didn’t say anything.” The IRS isn’t bound by its old mistakes, as a Minnesota couple learned yesterday in Tax Court.
The couple took an IRA deduction on their 2007 return. Unfortunately for them, they had no wage or self-employment income. You can only take an IRA deduction if you have such “earned” income. Ah, but they had been audited!
Petitioners contend that respondent determined the same issue in petitioners’ favor as to 2006, thereby establishing precedent. However, each taxable year stands alone, and the Commissioner may challenge in a succeeding year what was condoned or agreed to in a previous year. Auto. Club of Mich. v. Commissioner, 353 U.S. 180 (1957); Rose v. Commissioner, 55 T.C. 28 (1970). Thus, respondent’s concession of or failure to challenge the IRA deduction in a prior year does not necessarily entitle petitioners to the deduction in subsequent years.
If the deduction is improper, you don’t get a permanent private exception for it just because the IRS missed it before.
Cite: Niesen, T.C. Summ. Op. 2011-71